Debt-Equity Ratio

Definition

The debt to equity ratio is measure of leverage. It shows how much debt a company has relative to its equity. Meaning, the debt-to-equity ratio shows how much debt a company is taking on in order to run its operations opposed to using its own funds.

Calculation

Debt to Equity = Total Liabilities/Total Shareholders' Equity

example: Company A has total liabilities of $200 and a total shareholders' equity of $250

$200/$250= Debt-Equity of .8

What this says, is that for every $1 of equity Company A has 80 cents of debt.

Why is this important?

Debt to equity is helpful for investors when assessing a company's risk exposure. Usually, the higher the debt to equity ratio the more risky an investment in a company may be. A low or declining debt to equity is preferred.

Financial Glossary Reference

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